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### Wk2_23Aug_Ch2

Course: ECN 306, Fall 2011
School: ASU
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Word Count: 507

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2 Week (Tuesday, 8/23/2011) Complete Chapter 2 Thursday Begin Chapter 3 End of Chapter Problems: 5, 7, 9, 11 Key Items from Last Week Autarky prices The region underneath a supply curve Consumer Surplus area -Price benefit Triangular Net after subtracting Po Qo units cost of Effect of Price Reduction Triangular area -P Po expands Po z+y consumer surplus -area z area y by area Producer Surplus P P...

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2 Week (Tuesday, 8/23/2011) Complete Chapter 2 Thursday Begin Chapter 3 End of Chapter Problems: 5, 7, 9, 11 Key Items from Last Week Autarky prices The region underneath a supply curve Consumer Surplus area -Price benefit Triangular Net after subtracting Po Qo units cost of Effect of Price Reduction Triangular area -P Po expands Po z+y consumer surplus -area z area y by area Producer Surplus P P Surplus = revenue S Producer a total total cost = area a X Impact of Price Fall P Producer P P P)(Q-Q) S f g Loss of Surplus = (P-P) Q + (P- The Home Market Numerical Example Effects of Price Reduction from \$2,000 to \$1,000 Change in Consumer Surplus = (Area t ) + (Area d) = [(\$2,000 - \$1,000) 40] + [1/2 (\$2,000 - \$1,000)(65 40)] = \$40,000 + \$12,500 = \$52,500 or \$52.5 million Effects of Price Reduction from \$2,000 to \$1,000 Loss in Producer Surplus = (Area w ) + (Area v) = [(\$2,000 - \$1,000) 15] + [1/2 (\$2,000 - \$1,000)(40 15)] = \$15,000 + \$12,500 = \$27,500 or \$27.5 million Autarky Equilibrium Two Different Countries AUTARKY (Before Trade) Price SF Price S PD D DF PF Derive Import Demand Curve Price 2000 . 1000 0 Q 50 Derive Import Demand Curve Price 2000 . 1000 0 Q 50 Derive Export Supply Curve Rest of the World Price Price Price 1000 1000 1000 700 700 . 700 0 25 50 Q 50 50 Derive Export Supply Curve Rest of the World Price Price Price 1000 Sf 1000 1000 700 700 Df 700 . 0 50 Key Questions 1st Part of Course 1. Why do countries trade? 2. What determines the pattern (or composition) of trade? 3. What are the effects of trade on each countrys economic structure? Production, Consumption. 4. For each country, what are the overall gains (or losses) from What trade? 5. are the effects of trade on the distribution of income within each country? Winners, Losers. Effects of Opening Up to Trade At home (importing nation) Price falls, QD rises, QS falls the difference QD-QS met by imports Abroad (exporting region) Price rises, QD falls, QS rises the difference QS-QD is exported Impact on Home Economic Wellbeing Consumers Gain areas a + b + d Producers Lose area a NATION AS A WHOLE Gains area b + d, otherwise known as Gains from Trade Impact on ROW Economic Wellbeing Consumers Lose areas j + k Producers Gain areas j + k + n NATION AS A WHOLE Gains area n, otherwise known as Gains from Trade Which Country Gains More? Gain for U.S. Area b+d = (Change in Internal Price) (Imports) Gain for ROW Area n = (Change in Internal Price) (Exports) Divide the two: Gain for U.S. (Change in Internal Price) ---------------= --------------------------------- A Numerical Application You are given the following equations: Demand: P = 291 40 Qd Supply: P = 0.5 + 35 Qs How do you compute autarky price? How do you determine autarky Qd? How do you determine autarky Qs? A Numerical Application IN autarky, Qd = Qs. Rewrite Demand: (1/40) P Rewrite Supply: P(1/35) Qd = (291/40) Qs = -(.5/35) + Set the two equations equal and solve for P (291/40) (1/40) P = -(.5/35) + P(1/35) P =? How would you obtain Qs and Qd in autarky? A Numerical Application Suppose the country is now trading freely and the world price of the product is P = \$67 What is QD and QS under free trade? Is the nation an exporter or importer of this product? What is the quantity imported or exported? How would you calculate the Gains from Trade? For Thursday, Start Reading Chapter 3
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ASU - ECN - 306
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